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New Grads, Here's What To Do With Your First Paycheck

4. Gym and transit benefits and more Your benefits package might have other money-saving offers in it. For instance, some health insurance companies offer reimbursements of, say, $200, if you attend the gym a number of times within a certain period. If you live in a big city with a public transportation system, your company may offer a tax-free way of buying your transit pass. Ask your Human Resources representative and coworkers what other benefits they use.

Set Up Checking and Savings Accounts

Set up a checking and savings account, and if you already have such accounts, reassess whether they are still a good fit for you. For both accounts, you’ll get the best interest rates if you open online accounts. (You can search and compare accounts at Bankrate and SavingsAccounts.com.) Oftentimes, online banks will reimburse you your ATM fees. For savings accounts, you’ll also want to choose a bank that allows you to hold “sub-accounts” that divide your savings into specific pots, such as “Vacation,” “Emergencies,” “Down payment,” etc. And for checking accounts, you’ll want to avoid fees such as overdraft and ATM fees.

If you decide you really need to be able to talk with a banker in person, then look into community banks or credit unions, which tend to offer higher rates and lower fees, for your checking account. But no matter what, try to keep your savings in an online bank, says Bera: “Set up a high-yield savings account at an online bank so you’re earning close to 1% instead of nothing. And keep it at a separate bank from where you have your checking account. That makes it harder to access so you really have to think hard before you transfer money from your emergency savings.”

You can either have your paycheck deposited into your checking account and then set up an automatic transfer to move money to your savings account, or you can set up direct deposits to both accounts — for instance, ask for 10% to go to savings and 90% to go to your checking, or a 20/80 split. (In a future story, I’ll cover how to decide how much to put toward each.) Your savings account will hold the money you’ll need for three things: big emergencies, in case you are ever laid off or have unexpected medical expenses; smaller maintenance such as car repairs or insurance premiums; and finally, “fun” savings for, say, vacations and holiday gifts.

DuQuesnay says that your short-term savings will help you pay things like an auto insurance payment you have to make every six months, or the co-pay for a doctor’s visit and a prescription. And having this extra stash is essential to keep you from falling into debt. “I can’t tell you how many people have their car break down on them and have to spend $1,200 on that and put it on a credit card because they didn’t have a cash reserve,” DuQuesnay says.

She recommends that you automate as much as you can: “If your employer will allow you to split your paycheck into checking and savings, do that, so you never even see the money in your checking account, because the moment that money goes into your checking account, you’ll spend it.”

Open A Roth IRA

Because saving for retirement is such a challenge, you should also set up what’s called an Individual Retirement Account. It differs from a 401(k) in that you’ll pay taxes on the money you contribute now, but then when you withdraw the money, you won’t pay any taxes — either on the amount you contributed or on the money you earned — which is a huge savings. (Because of this very appealing advantage, however, you can only contribute $5,500 a year into any IRA, at least for the year 2013.)

You can set up an IRA at any discount brokerage firm such as Fidelity or Schwab, and then you can either have money transferred directly from your checking account to your Roth IRA each month, or you might even be able to have the money directly deposited.

“The part that people forget is to do ‘the buy,’” says Bera. “You have to buy investments when you do that transfer. You can set up what’s called an Automatic Investment Plan. Let’s say you’ve set up a contribution from your checking that transfers on the 1st of every month. Go to your Roth, and set it up to make an automatic buy on the 5th of every month to, for instance, a target-date fund.” (A target-date fund is a mutual fund that holds a mix of investments deemed to be appropriate for people retiring at a certain year.)

The Rest Of Your Paycheck

Now, as for what’s leftover in your checking account, you need to live on that. In the next story, we’ll go over how you should budget — how to decide how much your rent or mortgage should be, the amount you should pay toward student loans and what to to put toward all of the above accounts. And, you’ll learn how much fun spending you can do each month.

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